Level 3 bonds jump on financing news; primary quiet

By Paul Deckelman and Paul A. Harris

New York, Feb. 22 - News that Level 3 Communications Inc. will sell $800 million of convertible notes, putting cash in the Broomfield, Colo.-based telecommunications company's coffers and easing investor concerns that it might run short of liquidity, helped Level 3's bonds firm handsomely into the mid-80s Tuesday from prior levels in the 70s.

Primary activity was almost nil, as market participants straggled back in to work after the three-day Presidents Day holiday weekend, which had seen thin trading in an abbreviated session Friday followed by a full market close on Monday.

Level 3 was clearly the standout performer Tuesday, its benchmark 9 1/8% senior notes due 2008 jumping to 84 bid, 85 offered, well up from 76 bid, 77 offered previously. A trader saw the company's 10¾% senior notes due 2011 likewise "up points" at 89.75 bid, 90.75 offered.

At another desk, the 9 1/8% notes were quoted as high as 85 bid, up nine points on the session.

Level 3 bonds, said a trader, "were down quite a bit a week ago. They're recouping what they lost back then."

The bonds were seen to have pushed up in response to the news that Level 3 will sell the new 10% senior convertible notes due 2011. The move will give the company added liquidity and financial flexibility. Proceeds from the new deal are expected to be used for general corporate purposes, possibly including debt repurchase.

Level 3 on Tuesday also announced that it was terminating its "poison pill" anti-takeover defense, which had been instituted some years ago. That caused its New York Stock Exchange-traded shares to jump 35 cents (18.13%) to $2.28, on volume of 47.9 million shares, more than four times the usual activity level.

That decision by Level 3 - which chief executive officer James Q. Crowe said had been undertaken "after careful consideration," because such a step "is in the current interest of the company and its stockholders" - sends a signal to the financial markets that Level 3 could be for sale if the right offer were to come along. The telecom industry has recently seen a number of large merger and acquisition transactions, including SBC Communications Inc.'s pending purchase of AT&T Corp., the current battle between Verizon Communications Inc. and Qwest Communications International Inc. for MCI Inc., and Sprint Corp.'s pending acquisition of Nextel Communications Inc.

However, the company said in its statement announcing the decision that the decision to terminate the plan "was not made in connection with any pending business transaction."

Allied Waste jumps, ends unchanged

Elsewhere, a trader said that Allied Waste Industries Inc.'s announcement of a $4.65 billion refinancing plan Tuesday caused the Scottsdale, Ariz.-based solid waste company's bonds to "pop up 1½ points initially, but ultimately sent the bonds back down, so they were mostly unchanged."

For instance, he said, Allied Waste's 7 5/8% notes due 2006 - one of four series of existing bonds the company plans to take out with the proceeds from the refinancing - ended up just ¼ point at 103 bid, 103.5 offered.

At another desk, a trader saw those bonds at 102.75 bid, 103.375 offered, down slightly from earlier levels above 103 bid.

He saw its 7 7/8% notes due 2013, which are not being taken out as part of the refinancing, as having dipped to 103.75 bid, 104.75 offered from 104.5 bid, 105.5 offered in the early going.

And he saw the 8 7/8% notes due 2008, also not being tendered for, little changed at 107.75 bid, 108.75 offered.

Allied Waste plans to put in place a $3.45 billion credit facility, which includes a five-year, $1.55 billion revolving credit facility. It says it has already gotten commitments from its lenders for more than the $1.55 billion. It will also line up a seven-year, $1.45 billion term loan and a $450 million institutional letter of credit facility.

Further, it will issue about $600 million of 10-year senior notes, $100 million in common stock and about $500 million in three-year mandatory convertible preferred stock.

Proceeds from the financing transactions will be used to, among other things, pay off its remaining $195 million of 10% senior subordinated notes due 2009, its $125 million of 9¼% senior notes due 2012, its $600 million of 7 5/8% senior notes due 2006, and its $70 million of 7 7/8% senior notes coming due next month (see "Tenders and Redemptions" elsewhere in this issue for full details).

The company will also fully pay off its existing credit facility and reduce its term loan by more than $100 million.

Winn-Dixie gyrates, ends lower

From the distressed debt market came word that Winn-Dixie Stores Inc.'s 8 7/8% notes due 2008 were yo-yoing around wildly during the session, from as high as 61-62 bid to as low as around 50, before falling back from the peak levels to close out at around 56 bid, 57 offered, down perhaps two points on the session, after the Jacksonville, Fla. -based supermarket chain operator filed for Chapter 11 protection late Monday in New York. The bonds are now trading flat, or without their accrued interest, as generally happens following a bankruptcy filing.

The company's pass-through 7.808% notes, secured by interests in the liens on the company's stores, were seen having risen to 73 bid, 75 offered, and its 8.181% pass-through notes were at 72 bid, 74 offered, both well up on the session from prior levels around 67-68.

Unlike the 8 7/8% notes, which are considered unsecured debt, the pass-throughs, located higher in the capital structure, were still trading with their accrued interest.

Primary quiet amid ugly market

Although some sources specified Tuesday that a considerable number of the high yield oars were left unmanned trailing the extended holiday weekend, there was general concurrence that it was an "ugly" day in junk land.

The primary market produced an extremely paltry ration of news during the session, as Allied Waste Industries, Inc. announced that it plans to sell $600 million of 10-year notes, and Dublin, Ireland glass container company Caono plc (Ardagh Glass) was heard coming with a €125 million PIK note that it plans to price in a Wednesday drive-by, to fund a dividend.

A quick correction or a new trend?

High yield spreads were broadly wider on the day, sources told Prospect News, citing a sharp sell-off in the stock market and lots of kindling for the inflation-warning fire.

"Today is very ugly for the market across the board," one sell-sider said.

"If KKR succeeds in bidding for Masonite there will be a bond offering, there," the investment banker added, noting last weeks news that pending shareholder approval of a C$2.05 per share increase in the offering price, the Stile Acquisition Corp./Masonite International Corp. bond deal appears on track to return to the high-yield market.

The Deutsche Bank Securities, UBS Investment Bank and Scotia Capital-led deal does not appear likely to return for some time, however, as the shareholder meeting has been set for March 31.

"There's also Allied Waste," the sell-sider said, referring to Wednesday's announcement that the Scottsdale, Ariz. solid waste disposal company plans to sell $600 million of 10-year senior notes (BB-).

Information, such as timing or bookrunning names, was scarce in the wake of the press release, according to market source.

The company is concurrently in the market with a $500 million convertible deal, $100 million worth of common shares and a $3.45 billion credit facility, all three of which involve Citigroup.

"Other than that there is not much.

"Plus you have Treasuries selling off significantly.

"People are watching the market closely," the sell-sider added. "They want to know where the thing is headed - whether this is a quick correction or a new trend."

Spreads generally wider

One buy-side source, from a hedge fund, told Prospect News on Tuesday that high yield might be poised for a significant correction.

"We have hedged out a lot of exposure," the investor said, adding that within the past fortnight the fund had taken short positions in high-yield indexes, "simply to protect our portfolio.

"At first we lost money because things continued tightening," the investor said. "But now it seems to finally be giving up the ghost.

"The problem is that if these spreads continue to widen we think that they are going to widen big.

"Bids are drying up a little. People trying to figure out exactly what to do."

Long end headed higher

The investor said that the U.S. Treasury's 10-year bond finally appears to be succumbing to pressure coming from a variety of sources, with the yield going up Tuesday by as much as 25 basis points.

"With Greenspan basically saying that it's an anomaly that we have these low rates, people are starting to realize that an inverted yield curve is not in the cards, initially.

"If the short end continues to go up and the Fed continues to tighten, it's not going to take a lot for the long bonds to fall out of bed.

"And if you look where rates were when the Fed started tightening, the long bond was higher then than it is now. So it's amazing that it has stayed so low."

But Tuesday's most dire news, the buy-sider said, came not from the Federal Reserve but from Asia.

"South Korea said that they were going to diversify out of U.S. Treasuries," the investor noted.

"South Korea trails China and Japan in terms of the amount of U.S. paper that they own. So it's more emblematic than anything. But the fear is, 'What if China and Japan do the same thing, and start going into euros?'

"That's what people are doing - they're diversifying into euros."

Prospect News followed by asking this investor how high the yield would be on the 10-year Treasury at the close of 2005.

"I don't think it goes above 5.00% because there is really nowhere else to put your money," the buy-sider contended.

"From the standpoint of an overseas investor, there are not many places to invest that much capital. You can go to the euro market and utilize a fair amount of capacity there for a while. But you are still getting a ton of dollars into the economy.

"Certainly Korea has an easier time diversifying away from Treasuries than does Japan or China because the amount of U.S. dollar purchases that are done between the U.S. and China, or between the U.S. and Japan, is far higher on a percentage basis than it is with South Korea."

Meanwhile a sell-side source had no trouble believe such numbers.

"With the South Korean government talking about diversifying out of Treasuries, the 10-year can easily go up to 4.50% any day, or any minute. So 5.00% is not really a wild guess because the Asian countries have been buying up more than one-third of the bonds at the Treasury auctions.

"The 30-year Treasury is up to 4.685%. After a long holiday that is notable."

Thin ranks

Right around the close of the stock market, a dealer told Prospect News that one of the major forces at play in junk during the session was the notably thin ranks of players trailing the three-day Presidents Day weekend.

"A lot of the participants are missing in action," the dealer said.

"Also the stock market is looking pretty ugly - down 173 points. And oil is getting ever higher. It's up $2.41, which is the biggest move in a couple of months.

"I think people are little shell-shocked."

The dealer also said that the high-yield new issue calendar, at present, is looking "very slim."

The only deal announced during the session was Caono plc's €125 million offering of 10-year senior PIK notes (B+).

The notes, which will price at 99.00, are talked at 10¾% to 11%, with pricing expected on Wednesday via Citigroup and BNP Paribas.

Proceeds will be used to make a contribution to Dublin, Ireland-based glass container manufacturer Ardagh Glass.

Elsewhere the pending business for the three remaining sessions of the holiday-shortened Feb. 21 week comes primarily in bonds with European currency denominations.

Focus (Finance) plc (Focus Wickes Group) began a roadshow Tuesday for £100 million of 10-year mezzanine notes (B3/B/B) via ING.

Alstom Group is expected to sell up to €350 million of 6¼% notes due March 3, 2010, priced at 99.829 to yield 6.291%, during the present week via BNP Paribas and Merrill Lynch & Co. The deal is coming alongside an exchange offer.

Meanwhile the only dollar-denominated offering that sources have penciled as being likely to price before Friday's close is Penn National Gaming Inc.'s $300 million of 10-year notes via Deutsche Bank Securities.

A source close to the deal told Prospect News last Friday that Penn National might be coming as early as Tuesday, Feb. 22. When contacted Tuesday, however, the source insisted that timing on the deal is remains imminent.

A high-yield portfolio manager, speaking on background, agreed.

"It makes sense that they would be coming to the market," the investor said, adding that the $300 million size "sounds just about right."

When asked to comment on the present state of the junk market the investor responded: "The market looks fully priced.

"People are obviously looking at what interest rates are going to do. Last Friday's news about the producer price index obviously put a little bit of a damper on things."

Asked whether there would be repercussions from the Winn-Dixie bankruptcy filing, the investor thought it unlikely.

"I don't think that surprised anyone," the portfolio manager said. "That has been a deteriorating situation for some time.

"Obviously the grocers have been under pressure for some time and Winn-Dixie has had some operational issues."

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